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Forterra, Inc.  (NASDAQ:FRTA)
Q4 2018 Earnings Conference Call
March 12, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 Forterra, Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

It is now my pleasure to hand the conference over to Charlie Brown, Chief Financial Officer. Sir, you may begin.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thank you and good morning to everyone. Welcome to Forterra's Fourth Quarter 2018 Earnings Conference Call. Before turning the call over to Jeff, I will point out that Forterra intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as noted in the earnings release, we filed this morning.

Please remember that our comments today may include forward looking statements, which are subject to risks and uncertainties and actual results may differ materially from those indicated or implied by such statements. Some of these risks are described in detail in the Company's SEC filing, including our annual report on Form 10-K that was filed this morning. The Company does not undertake any duty to update such forward-looking statements.

Additionally, we will refer to certain non-GAAP financial measures during this call, including EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure and other related information, including discussion of why we consider these measures useful to investors in our earnings release.

Now, Jeff Bradley, our Chief Executive Officer, will give an update on our business.

Jeff Bradley -- Chief Executive Officer

Good morning, everybody, and thank you for joining us on the call this morning. Our results for the quarter and the full year reflect the progress we have made on our initiatives and strategic actions. In spite of record levels of rainfall and many of our key markets, throughout much of the year, gross margins, income from operations and adjusted EBITDA margins were all higher in the fourth quarter and the year versus fourth quarter and full year '17.

In our Drainage business, our fourth quarter results validated our continued solid execution, despite record rainfall in a number of regions. Gross profit and adjusted EBITDA in the quarter and the full year were higher as result of higher selling prices and increased cost efficiency. Our accomplishments in Drainage reflect the benefit of our strategic transactions in 2017 and early 2018, our organizational realignment, our procurement initiatives and our focus on improving the operations.

We'll continue to drive the business for further improvement this year. In the Water segment, our financial results do not reflect the progress we made last year. In response to significant increases in scrap cost throughout the year, we undertook a thorough evaluation of the business. Beginning in the second half, we made senior commercial and operational leadership changes. We talked last quarter about the benefit of higher selling frozen our bookings and backlog, and those higher prices helped to drive sequential quarter margin improvement, in spite of the seasonally slower fourth quarter. Our operational initiatives have significantly increased our productivity, and we expect further margin improvement this year.

Turning to our outlook for the Company. I'm encouraged by the end market fundamentals, starting with highway infrastructure, the largest driver in our Drainage segment. We anticipate strengthening demand based on the favorable outlook in certain key markets, including Texas, California, Colorado, Florida and the Midwest. We're seeing the benefit of improved state and local funding measures and the growing pace of lettings in the first quarter, and we anticipate continued growth in lettings for the full year.

Our positive outlook for the residential and commercial construction markets is based on conversations with our customers that support our expectations for growth this year. In addition, the National Association of Home Builders forecast reflect continued low-to-mid single digit growth in single family home starts this year and next year, in most of our key markets.

In summary, I'm encouraged about the demand outlook for the year, and we'll continue to drive improvements in the businesses. We expect another year of higher margins and earnings. Charlie?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thanks, Jeff. In the fourth quarter, we reported income from operations at $5 million and adjusted EBITDA of $33 million, which was just above the midpoint of our guidance range. One highlight, I'd like to start with, is that our team has successfully cleared all material weaknesses in internal controls. The final material weakness relating to our IT General Controls was identified in October, and due to the technical nature did require some outside assistance. These unplanned expenses caused our corporate costs to be somewhat higher than our guidance, but the remediation work is behind us and we'll now focus on driving efficiencies.

In Drainage, we delivered higher gross profit, income from operations, adjusted EBITDA and adjusted EBITDA margin through higher selling prices, to benefit our cost control initiatives and lower rent expenses. In Water, we deliver sequential quarter improvement in both our gross margin and adjusted EBITDA margin, which fell short of our guidance to match prior year's adjusted EBITDA. Significant progress in operations, increased production capacity, while commercial efforts strengthen customer alignment. Despite this progress, weather slowed shipments and as a result, we're not able to fully offset the fact that the scrap market was more than 20% above the same quarter last year.

In regards to the balance sheet, we ended the quarter with $36 million in cash. Our cash flow from operations for the year was $15 million lower than 2017, despite higher adjusted EBITDA, due primarily to an increase in our ending inventory in both our Drainage and Water segments. The inventory increase was due to weather related shipping delays, as well as strategic decision to accelerate the normal seasonal build in inventory of ductile iron pipe to support our customers.

Turning to our 2019 outlook. We expect income from operations to be in the range of $60 million to $90 million. Net loss $38 million to $16 million and adjusted EBITDA of $170 million to $200 million. Our forecast anticipates continued strong execution in Drainage and margin improvement in Water, on the benefit of higher selling prices and operational improvements. The lower end of our guidance range reflects more conservative assumptions, regarding the weather to the balance of 2019.

Our first quarter is being impacted by above the average precipitation in many of our key markets, including Texas, Florida, California, the mid-Atlantic region and the Midwest. In addition to weather, we face a tough comparison to the first quarter of last year due to high steel costs. While steel and scrap costs rose precipitously in the first quarter of 2018, the financial impact was largely deferred into the subsequent quarters, as the cost moved through inventory.

As a result, we expect that our full year forecasted growth in EBITDA will be weighted toward the back half of the year. Our earnings release posted last night also included a summary of key cash inflows and outflows highlighting the anticipated benefit of lower payments on our tax receivable agreement and positive cash flow from working capital, as we bring inventory back to more normalized levels by the end of 2019.

We're committed to making progress and improving our capital structure and plan to initiate voluntary repayment of our term loan in the range of $30 million to $85 million this year. In summary, against the backdrop of good end market demand fundamentals, we are well-positioned to deliver improved results in both our businesses. Our conversion to full year guidance reflects end market confidence, as well as progress in our forecasting and control processes. And our plan to reduce leverage reflects our intent to be a long-term leader in these markets.

That concludes our prepared remarks. Operator, will you please open the line for questions?

Questions and Answers:

Operator

My pleasure, sir. (Operator Instructions) And our first question will come from line of Rohit Seth with SunTrust. Your line is now open.

Jeff Bradley -- Chief Executive Officer

Good morning Rohit. We cannot hear you.

Operator

Alright Mr. Seth, please check your line to see if you're on mute.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Hey, guys, thanks for taking my question. My question is on your Water business. I'm looking at a chart with iron and scrap steel prices and your ductile to iron prices. Since you went IPO that relation has been unfavorable, it's kind of led to where you are today, on the stock. But it's finally crossed and turned positive in January. And I just want to check with you if that reflects the reality on the ground? And if so, when you think that it will start to flow through the P&L?

Jeff Bradley -- Chief Executive Officer

Hey Rohit, this is Jeff. Yes, it does reflect the reality. We expect 2019 in terms of scrap prices to be softer than last year. I don't have your chart in front of me, but I'm sure it shows accelerating price increases. So we see just really a softer year this year in scrap pricing. It typically takes 45 to 60 days for those costs to flow through our inventory.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah. So the prices obviously came up significantly in 2018, from end of 2017 through 2018. There may be some just that softening, but it still fairly high. And we have raised prices to offset that, and going into 2019, that is our, one of our core issues is offsetting inflation with price.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Where do you think the margin profile can go in the Water business? What did you assume in the guidance?

Charlie Brown -- Executive Vice President and Chief Financial Officer

We are focused on improving those, as Jeff commented on. And, I think that, yeah, and so we've delivered, we want to stay conservative as we have. But I'm certainly looking to see improvement.

Jeff Bradley -- Chief Executive Officer

As I said in my comments, we see higher margins this year for the Company versus last year.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

I mean, is that all Drainage driven or what -- and -- can I know what other issue we're thinking about in the Water business? I think the Drainage seems fine, and you guys have delivered margins of -- recovered to where they were, when you're in an IPO largely. It's really just a sticking point on Water. The scrap been -- scraps coming off, you had your prices going up, that could be interesting. What other risks are out there?

Charlie Brown -- Executive Vice President and Chief Financial Officer

No, we agree, it will be Water improvement. Let me just first say Drainage, yes, we believe there is still opportunities for us to continue to improve Drainage. And that is going to be a focus area. But no -- when we are talking about improvement in both businesses for 2019. And Water opportunities do exist obviously, from where we have been. And looking forward, that is certainly going to benefit from the work that was completed in the second half of 2018. Again, as Jeff referenced, we made a number of management changes and brought some good new practices to bear that should be benefiting us early in 2019.

Jeff Bradley -- Chief Executive Officer

And just to piggyback on that, we're pretty excited about the operational improvements, that we've seen in the Water business, that started in the middle of last year and have continued to improve through the end of the year. We see additional improvement this year, and that's really a function of the leadership change. We talked about scrap, our backlogs are strong in both businesses. Pricing is up and the backlogs of both businesses, versus a year ago. So, those things will all lead to our optimism for this year.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Okay. Can you just talk me through what's assumed in the low end of the guidance?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure, that is primarily the weather impact. It would be obviously not where we'd like to come out. But as you've seen in the past, weather is an impact on our business, we're on outdoor sport, and we have to be cognizant of that. But certainly we would expect to do better than that. And this being early in the year, we want to make sure that we give ourselves room to be able to continue to deliver within our guidance range.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Got you. And then last one, just on the homebuilding side of things, 40% of your business. The home builders saw order rates slow in the second half of 2018, but you're talking about increasing their community counts in 2019, which --, I think that's more relevant for you guys as you supply the pipe that goes into the infrastructure for the residential side. So can you just talk me through what you're seeing in your footprint on that front? And are you more optimistic on housing in 2019 related to what you saw in 2018?

Charlie Brown -- Executive Vice President and Chief Financial Officer

So I would just start with the fact, when we referenced 40% related to housing, that is, that is specific to the Water segment. And it's less impactful to the total Company. But the full year, the view is, as you said new neighborhood formation is probably the more important metric for our Water business than the houses themselves.

Jeff Bradley -- Chief Executive Officer

Yeah, in addition to that, I referenced the National Association of Home Builders to forecast they have there, which is low to mid-single digit growth. But we go back to our backlogs. Our backlogs are strong. Our backlogs are composed of residential, commercial, infrastructure, and that strength in backlog is across all of those segments.

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Yeah, and on unemployment -- yeah, if you look at unemployment rates there, the strength that we have there will ultimately lead to household formation. And so we see that it looks pretty bright. Well, we've had definitely gone through a pause at the end of 2018. Our discussion with customers seems very positive going forward.

All right. Thank you.

Operator

Thank you. Our next question will come from one of Ian Zaffino with Oppenheimer. Your line is now open.

Ian Zaffino -- Oppenheimer -- Analyst

Hi. Great. Just honing in a guidance one more time. The high end -- what is that assume for weather is not perfect weather or that's you're assuming some type of other issues there?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Ian, it's good to hear your voice. Yes, we're not assuming perfect weather. We're assuming more normalized weather. So obviously we'd love to do even better than that. But as you know, there will be weather in 2019, as we've already seen so far. And, we want -- as we go through the year and we see more clarity, we'll give more clarity on our range. But no, it doesn't have to be perfect weather for us to deliver.

Ian Zaffino -- Oppenheimer -- Analyst

Okay, and then...

Jeff Bradley -- Chief Executive Officer

I was just going to say, if we look at 2018, we look at the extreme events in Texas, we would have September and October, very high amounts of rain. And just to remind everybody about the business we're in, our business is the underground pipe business. So when there is heavy rain, the ground gets saturated. And it takes time for that to dry out. As another business where everything is built above ground, you don't have to wait as long for the ground to dry out. Then in the first quarter of this year, we've had heavy rains on the West Coast, the Minnesota areas had heavy snow and very, very cold. Denver's had a lot of snow in excess of what we had in the plan.

Ian Zaffino -- Oppenheimer -- Analyst

Okay. And then also as far as debt paid down, you mentioned that's going to be a big priority. What should we be assuming for the amount of debt pay down? And are we -- does not preclude any acquisitions, so we're not going to see any acquisition this year? Thanks.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure. As the debt pay down, I mean, we're talking of $30 million to $85 million. It's really applying all of that free cash flow, that is the result of the calculations we provided. Acquisitions, we will continue to pursue acquisitions. We have talked about self-funding those through the disposal of other assets. That's really just looking at our portfolio and managing it more effectively. We have, as you know, when we did the sale leaseback arrangement, we brought back several properties which we will be able to monetize. And that funding will be applied. And, as you might have noticed in the queue, we did actually complete an acquisition in the first quarter already. We've spent about $12 million. But again, we anticipate to offset that through our disposal process.

Jeff Bradley -- Chief Executive Officer

And just add to that, Ian, the acquisitions we would be looking at and we're looking at a couple right now, are really on the smaller side. I think last quarter I talked about really looking at singles. So that's what we'll be looking at.

Ian Zaffino -- Oppenheimer -- Analyst

Okay, great. Thanks again, guys. Appreciate this.

Jeff Bradley -- Chief Executive Officer

Thanks, Ian.

Operator

Thank you. Our next question will come from line of Nishu Sood with Deutsche Bank. Your line is now open.

Timothy Daley -- Deutsche Bank -- Analyst

Hi. This is actually, Tim Daley on for Nishu. Thanks for the question. So I guess the first one is around the Water segment. I appreciate the color there. And so you mentioned that margins should improve over last year, kind of driven by the price increases along with some, I guess raw material kind of tailwind there. But how should we be thinking about the impact of price increases enacted in late 2018, should have on revenues? Were those enough that we could potentially see revenues grow on a year-over-year basis? Or should we really just kind of be keying in on that margin line?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think we're obviously looking at the margin line because that's very important for all of us. But now, we do see growth, we see the opportunity in both the price increase and we'll increase revenue as well as the volume.

Timothy Daley -- Deutsche Bank -- Analyst

All right. That's helpful. And then I just want to clarify on a comment that was made earlier. Do you guys anticipate that there will be margin improvement in both segments on a year-over-year basis? Just given the fact that there are maybe a bit more inflationary headwinds given the building material producers seem pretty positive on their price increases, sticking in kind of the mid-single digit, high single-digit range. But they haven't really achieved over the last two years. So if you could kind of just help us understand price cost in the Drainage and how you're thinking about it in 2019? That'll be really helpful.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure. I think the overall comment is that we are targeting, getting price to more than offset our inflationary pressures. We're certainly supportive. We saw in 2018 pretty significant increases on the steel side. We understand that some of our other suppliers are also anxious to get price increases this year. We do believe that we will be able to pass that on to our customers, and this market where demands are very high.

Jeff Bradley -- Chief Executive Officer

Just add to that, steel is a big input cost on the Drainage side, and we see steel leveling off from the level we saw last year. Somebody had mentioned a chart on scrap pricing, if I think if you laid the steel pricing -- steel cost on top of that, you would see a similar type of graph. So we see that leveling off as well.

Timothy Daley -- Deutsche Bank -- Analyst

All right. And then just the prepared remarks you guys discussed that kind of the one -- first half of the year will be a bit of a struggle given the weather, steel scrap inflation, I guess the delay in kind of that inflection point still kind of weighing on the first half the year. So how should we think about the kind of net income guidance and the earnings guidance on a quarterly basis? Should we kind of think of any negative or net losses in the first half offset with a bit or partially offset with positives in the second half or is that simply kind of maybe a 1Q event?

Charlie Brown -- Executive Vice President and Chief Financial Officer

No. I mean, I think, the first quarter is just one of the most difficult to hit, it is our least impactful quarter ever. And it is -- it comes down as Jeff said, the saturation of the ground and then the continued rain has definitely made this very uncertain. And, we're early -- we're midway through March, let's say. And this is by far our most important month in the quarter. So we really have a very hard time judging that. So I don't think there is really much of a message that we're trying to get across besides -- we've moved away from quarterly guidance, because this is a -- it's a weather impacted business. It's much more about the demand profile that we want to get across. We see very good backlogs, lettings as you know are very strong on the infrastructure side. So we're well-positioned for success in 2019. It is more the immediate impact of weather in the first quarter to worry about. And I would not say, Tim, just to address your first comment. This isn't a struggle, we're not struggling, we are definitely focused on doing the right things, as you can see, we've built some inventory as we ended the year. We'll have to move that through our system. These are all normal processes when you get impacted like we have, as year end. Hopefully, that helps.

Timothy Daley -- Deutsche Bank -- Analyst

Yeah, it does. Apologies, struggle probably wasn't the right word there. But again, thanks for the time and I appreciate the details.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Appreciate the interest, Tim.

Operator

Thank you. Our next question will come the line of Matt Bouley with Barclay. Your line is now open.

Matthew Bouley -- Barclays -- Analyst

Hi. Thanks for taking my questions. I wanted to ask about that full year guide at kind of a higher level. You guys haven't given a really full year guidance. I think, since being public, Charlie, you did mention, I believe at the end of the prepared remarks, some improvement in forecasting practices. So why the change in guidance practice to that full year? I mean, I know you just mentioned weather volatility around, making it difficult on a quarterly basis. But what's giving you the confidence in kind of the longer-term visibility? And what are some of those changes you've made on the forecasting side? Thank you.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure. I think the important thing for us is, Matt, we've demonstrated over the past year and a half that we can forecast. We can look at the quarterly and we can give you guidance that we can achieve. We wanted to transition into 2019. I think the important -- the first stage and I'm going to count that just one more time. We cleared our material weaknesses. And that talks about the back office capabilities, our ability as an organization, our financials, the robustness of that. We've spent a lot of time and energy over the past year, building that up.

So our forecasting processes have gotten better that's an important component of our business in our accounting process. So I think those are the types of things which we've looked at. And then on top of that, just, the demand area that we focus on, while we only have maybe a one quarter backlog, we spend a lot of time with our customers and we look at the longer term implications for driving their demand and that all gives us the confidence to move forward. So I think Matt, it comes down to a maturation of our capabilities as a company. So Forterra has tried to very -- tried very hard to demonstrate that ability to grow and be able to deliver as promised.

So, yes, I think that this is an important landmark for us to be able to point to -- yeah we're able to look at the full year. It does get us out of the trying to guess what's going to happen in the last few weeks of the month and gets us toward what we really see as the underlying demand, which is a story that we'd much rather talk about, because I think it's very strong and we're well positioned to take advantage of that.

Jeff Bradley -- Chief Executive Officer

Tim, in addition to that, one thing I want to mention is the strength of the management team. We have really upgraded the management team here in the corporate office and -- the corporate office and in the businesses as well. I mentioned in my comments we made leadership changes on the Water side. We've also made leadership changes on the Drainage side, and these were changes to just improve the management team to upgrade it. Same here in the corporate office.

We have today the best team and teams that we have ever had.

Matthew Bouley -- Barclays -- Analyst

Okay, I appreciate all that color. Yeah, and then I wanted to ask about the working capital side, you guided to generating cash and working capital in 2019. I think in Q4 you called out in the release and I believe in the prepared remarks that actually weather was a bit of an issue on the inventory build. But there was also a decision to accelerate the seasonal build in DIP. So could you elaborate on what was behind that decision specifically? And then just going forward, what does that mean around -- or should we expect, I guess, a greater than usual release of inventory in the first half of 2019? Thank you.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure. So I think the build an inventory is specifically on DIP, was to address the concerns. As you may recall, this time last year, we were talking about some -- an outage in our major facility. And then throughout the whole year, we were really chasing, supplying our customers and keeping them with reasonable delivery dates. And in the third quarter I also made a comment at the end of the third quarter, that we were at operational -- effective capacity.

So it's important to note, we did not want to damage or hold back the demand from our our key customers. And thus as things slowed down at the end of the year, we made a conscious decision to build inventory. That unfortunately, that was a good thing for our customers. But as weather delayed delivery of several -- on both sides of the business, it did ramp up. And as you can see, it's almost a $50 million inventory impact on our balance sheet.

So that, that was not -- we did not plan on doing quite that much. But again, that's fine. We will move that through in 2019. And as we get your question is what the impact would be in the first half? As we bring that inventory down, we get ready for really Q3, which is our biggest quarter, as you know. And that we need to have make sure that we have good inventory on hand, because we cannot actually produce in the quarter, exactly what we need. We actually have to build up.

So we may still be a little bit high at the end of Q2. But as we go through Q3 and finish the year at Q4, we do believe, as indicated, that we'd bring this down $30 million to $50 million, and that offsets really what we've built for 2018 year end.

Matthew Bouley -- Barclays -- Analyst

Got it. Appreciate those details. Thanks again.

Jeff Bradley -- Chief Executive Officer

Of course.

Operator

Thank you. And our next question comes from line of Jerry Revich with Goldman Sachs. Your line is now open.

Benjamin Burud -- Goldman Sachs -- Analyst

Good morning, everyone. This is Ben Burud on for Jerry. Just wanted to start on, how end market demand is shaping up into 2Q? I appreciate that, obviously weather has been a big headwind, in 1Q and it's your seasonally weakest quarter. But, as we wrap up March here, can you kind of give us an idea how the pricing environment, how end demand is shaping up as we ramp into construction season?

Jeff Bradley -- Chief Executive Officer

Sure Matt, -- Ben, this is Jeff. We track our backlogs every single week. We update them. And as I have mentioned, our backlogs in both businesses are strong. Overall if you look at the company backlog, volume is up and backlog prices up. So that really gives us the confidence going into 2Q, that we share and really the confidence that we've shared about the back half of this year -- so it looks good.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah and I think it's both that is volume and price and those are important components for delivering the results we talked about.

Benjamin Burud -- Goldman Sachs -- Analyst

Got it. And then on the cost inflation side of things, can you give us an idea of what you're seeing, if any, on labor inflation and also on the freight side? Can you give us an update there? Spot rates start to tail-off versus strong 2018?

Jeff Bradley -- Chief Executive Officer

Sure, labor -- on the labor side, we see some inflation on the labor side, but we've got some great things going on -- on the operations side, to really take some of that labor cost out. We're seeing good results, last year where we continue to drive those results this year, so we're excited about all of that.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah, and I think, as freight is going to continue to be, it's important to us. We think that there is several things that we can do to improve that in 2019, not only will the rates start to fall, which we've seen. But also through efficiencies, we have been able to move some product, last year we had two truck. We should be able to have rail. We have railed into those markets. So with more efficient delivery, taking advantage of that benefit as well.

So I think there is good upside on both of those things. And as Jeff said, labor, while the rates will go up, we do need to pay our employees, because the employment situation is very tough. But right now that's been improved, I think Rich Hunter has done a wonderful job, our Chief Operating Officer has come in and looked at a lot of our processes and tried to take -- make those labor improvements that will offset the cost increases.

Benjamin Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thank you, Ben.

Operator

Thank you. (Operator Instructions) Our next question will come from the line of Scott Schrier with Citi. Your line is now open.

Scott Schrier -- Citigroup -- Analyst

Hi, good morning.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Hi, Scott.

Scott Schrier -- Citigroup -- Analyst

And Charlie, earlier you acknowledged that the aggs and cement players seem to be more aggressive in pushing price, something maybe they weren't able to get a lot of price in the past couple of years. You talked about, that you are raising price and you do expect margins to increase, but I'm curious as we think about incrementals and operating leverage in Drainage. Do you still -- do you expect it to be challenging? Or do you think that the pieces are in place to see a favorable operating leverage or incremental kind of number for 2019? And then just if I'm thinking about longer-term, how do you view the potential for operating leverage in the Drainage business?

Jeff Bradley -- Chief Executive Officer

Yes, Thanks. It's a good question. We work closely with all of our suppliers, let say on the aggregate, the cement. I mean, we're a large consumer, not the largest, but we're a significant player and we do have good relationships with these suppliers. We will work closely with them to make sure that we get the best prices we possibly can from them. But at the same time, we will be able to pass that on. We feel good about being able to pass that on. I think there is an important component of this, the market is -- the demands is there. So that costs will be going up for everybody. We should be able to take advantage of that, I mean getting the ASP or Average Selling Prices up to offset that.

And I do think the other improvements that we make will allow us to pull margins through. But I would make the point, Scott, that none of this was easy. This is -- this will take a lot of work, it's -- as Jeff talked about the team, we have a very good team focused on, and achieving this. You don't get price without working damn hard to get it. And we're willing to do that and see that -- it will yield good margin improvement for us as we go forward.

We did -- Scott we really -- great job last year bringing in Rich Hunter as CLO on the Water side. He spent an awful lot of his time in the business and we saw great operational efficiency improvements as we went through the second half of the year. He is continuing to work with his team and drive those improvements on the Water side. But this year, he is also put together a fantastic team on the Drainage side, and we see a lot of opportunity there to drive additional operating efficiencies, which going to impact our cost.

Scott Schrier -- Citigroup -- Analyst

Great. And then I want to reconcile some of the comments and discussions about the back half weighting. But, you do have your backlog now, it's up year-on-year. So I'm wondering if -- you talked about lettings and we've seen public lettings over the past 15 months, be up significantly. And then we look at some of the labor data for highway bridge contractors, actually has looked good. So I'm curious if, do we expect obviously weather aside that April, May and June that this stuff will be rolling through and that we could see a lot of strength in some of these end markets in the spring? Or do we have to wait until the summer and beyond, before you really start to see a lot of that roll through?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah, I think we're optimistic about the spring, again I hate to keep talking about the weather and rain. Spring is usually when we have a lot of rain. But in this past year, we've had rain throughout the whole year. But we're optimistic about the second quarter and the second half of the year. Our backlogs are strong, as I said, the contractors need to get back to work. I mean, we still have seen here in Texas, there are job sites that they haven't been able to get through for months because the ground is just saturated. So they're as anxious to get back to work as we are to ship product. So, pent up demand, pent up waters, lettings are strong. We're feeling good.

Scott Schrier -- Citigroup -- Analyst

And one last one, in the press release you made some comments, on some softness in Canadian concrete pressure pipe having an impact on the Water business. I'm wondering if you could talk a little bit about what you're seeing there and what we could expect to happen there during 2019?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yeah. Scott that just -- it is a very small part of our business, but it just slipped. And again, it comes down to just the projects that water, pressure pipe, which as you recall, we exited in the US and it is more of a lumpy business. So it tends to have some ups and downs. And this was just down for us. It's very large diameter product, where we don't play much at all, and there wasn't much work. So it was much more focused on certain other aspects, which are lower margin in that specific business segment. But again, not a significant thing, it'll be pluses and minuses. And we'll be able to throw that comment in, as necessary going forward.

Scott Schrier -- Citigroup -- Analyst

Thanks for taking the questions and good luck.

Jeff Bradley -- Chief Executive Officer

Thanks, Scott.

Operator

Thank you. And our next question will come from Andrew Casella with Deutsche Bank. Your line is now open.

Andrew Casella -- Deutsche Bank -- Analyst

Hey guys, thanks for taking my questions. Just actually just one, just on the debt repayment. When we think about the implementation there, is it your view that you will go into the open market to kind of capture some of the discount on your term loan, I know it's kind of trading around that $93 million, $94 (ph) million context, or would these all be part paydowns as you guys kind of think about attacking that maturity?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Yes, that is exactly how we plan on going out at it Andrew.

Andrew Casella -- Deutsche Bank -- Analyst

It's about , which one is it, both of them or the latter?

Charlie Brown -- Executive Vice President and Chief Financial Officer

We'll be buying it in the market.

Andrew Casella -- Deutsche Bank -- Analyst

Okay. All right. Thanks so much.

Operator

Thank you. And I'm showing no further questions at this time. So now it is my pleasure to hand the conference back over to Jeff Bradley, Chief Executive Officer for any closing comments or remarks.

Jeff Bradley -- Chief Executive Officer

Thank you, everybody. We really appreciate your interest. We look forward to talking to you to the balance of the year. Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.

Duration: 39 minutes

Call participants:

Charlie Brown -- Executive Vice President and Chief Financial Officer

Jeff Bradley -- Chief Executive Officer

Rohit Seth -- SunTrust Robinson Humphrey -- Analyst

Ian Zaffino -- Oppenheimer -- Analyst

Timothy Daley -- Deutsche Bank -- Analyst

Matthew Bouley -- Barclays -- Analyst

Benjamin Burud -- Goldman Sachs -- Analyst

Scott Schrier -- Citigroup -- Analyst

Andrew Casella -- Deutsche Bank -- Analyst

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